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What Euro Crisis?

Jul 5, 2012Norbert Walter
Crises are usually defined by sustained economic decline, high and long-term unemployment, poverty, rampant inflation, a precipitous fall in the exchange rate, fiscal deficits, high borrowing costs, and political dysfunction. But only a handful of "misery indices" are present in Europe today, and in only a few eurozone countries.

FRANKFURT – What constitutes a crisis? Is it sustained economic decline, high and long-term unemployment, poverty, rampant inflation, a precipitous fall in the exchange rate, fiscal deficits, high borrowing costs, and political dysfunction? Most would agree that a crisis exists if just some of these “misery indices” are present. But, while Europe is widely perceived to be in the grip of crisis, only a handful of them are present, and in only a few eurozone countries.

So, why is there a eurozone crisis, and what defines it? Time and again, it is argued that the single currency does not fit the different needs of its member countries, and that unsustainable economic divergence will ultimately require that the euro be abandoned.

The fatal divergences that are most frequently cited include differences in growth rates, job-creation, and unemployment rates, as well as dramatic disparities in current-account balances, all of which may be traceable to wide deviations in unit labor costs. Perceptions of such divergences force considerable risk premiums on problem countries, inevitably resulting in accelerating capital flight to safe havens.

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What is the definition of a "crisis"?
The writer gives us a list of symptoms necessary for the diagnosis of a "crisis".
Looking from a different angle we could also say that we are in a crisis when we understand that with our present attitude, method, structure we cannot solve our problems, cannot develop, step on the next level, in other words we enter a dead end if we do not change.
This happens usually when conditions around us evolve while we would like to remain as we used to.
This is what we are facing all over the world. While we evolved into a global, interdependent world where any individual action influences the whole system, we still would like to continue making decisions, actions based on self benefit, without taking the whole system into consideration. At the same time although it is getting clearer with every event of the crisis that our present excessive, overproduction/over consumption quantitative growth model is unsustainable, and destructive we still stubbornly push ahead with it as if we could somehow navigate ourselves back where we were before 2008.
Thus the only chance we have to start solving our problems is to first understand how and why we got where we are now, and what conditions, laws we need to use in order to harmonize our system, make it work in a balanced way.
The recommendations in this article pointing towards deeper integration, using the "strength and weaknesses" of the different parts of the global system in a considerate and effective manner is a step in the right direction.
But in order to use the "crisis" as a jumping board into a qualitatively higher level of development we have to address all the details, causes leading to it.
The writer is right a "crisis" does not have to be a negative event, if we use it, and all the information contained in it wisely we could build a safer, more predictable, sustainable future for all of us.

The article from Mr. Walter is encouraging. As one of the brightest economists in Germany and Europe he doesn't line up with the pessimistic views of Mr. Sinn and the likes. He decided to give a positive, but still realistic answer to the challenges we are facing in Europe. He is right in many ways and I want to remind all Euro-pessimists, that the income/productivity/..-gaps between Maryland and Mississippi (who are both in one Currency-zone) are wider than between Greece and Germany.

Europe needs to drive for stronger integration, improve competitiveness through structural reforms, etc. The current process is a tough one, but we will become the best-performing regions in the world.

This article sounds like an EU official on Hard Talk today who attempted to sell the audience on the positives while playing down the negatives...During their terms of office, EU politicians want to avoid any shocks to voters, banks or economies from taking any effective action in long term solutions.EU officials are similar but have slightly different politics in keeping their perks flowing.Plus in Germany local politics is holding back EU unity in the courts with no need to wait for elections. Eurobonds will not be approved; ECB will not be given greater powers to monetize debt. Greeks will neither be kicked out nor greatly disciplined. Periperal labor markets will not be changed to be more competitive. The delay tactics of 'bridge loans to nowhere', will continue as long as possible, regardless of what harm they might do. A blow up may still happen within 2012 as recessions decrease tax & bank revenue, bank runs escalate, bankruptcies increase etc. Bailouts needed may quickly grow beyond willingness to sacrifice one's own countries taxes to help foreign countries. The growth vs austerity debates seem to be only distracting from issues of non-competiveness.

DEMOCRATIC DEFICIT - "DESTRUCTIVE CREATION" OF THE BARRIERS TO KNOWLEDGE IN THE 21 C.

By Val Samonis

Rather than totally condemning any branch of economic thinking, this Global D(R)ecession is a product of Schumpeterian destruction of capitalism itself due to democratic deficit under the new conditions of the global knowledge economy. With such pre-eminence of knowledge in modern decision-making, the society at large, due to education and time demands, is simply unable to participate in the processes of ongoing financial-economic regulation (e.g. systemic risk monitoring and management, etc).
Thus, even under a normal democratic representative system that creates outward appearances of participatory democracy (far from the Swiss democracy yet), classes/elites of high-level decision-makers develop (in banks, insurance agencies, other intermediation institutions) that amass that powerful knowledge via clandestine cronyism and they are strongly motivated to (ab)use it (insider trading, etc) to their advantage (principal-agent conflict of interest), see for example the latest LIBORgate or the writings of S. Johnson and A. Admati from the Institute for New Economic Thinking. There is lots of other evidence for this democratic deficit functioning in such destructive ways in Europe, USA, other developed countries and emerging markets as well (e.g. hijacking of democratic and economic change by the former communist nomenklatura).

Such cronyism, nomenklatura, similar hijackings of the democratic process are modern manifestations of democratic deficit. In order to destroy or reduce their system destroying power that is now in full swing, institutions need to be developed by the society that constantly interpret the rapid pace of knowledge and change to the society at large through monitoring, analytical and broader publication efforts (education of the society at large). While part of this job is being done by universities, etc, it seems that modern societies need much more consistent efforts to close these dangerous knowledge gaps; otherwise insider elites will continue to destroy capitalism and democracy.

There is an experiential learning accumulated in some countries (notably Canada) that will help guide building of such institutions. The June 2012 EU initiative to build the Single Regulators of Financial Institutions should make use of that knowledge.

There is no crisis of the euro as currency. There is a European problem of sovereign debt. There is no single European economic crisis. Is the global economic crisis. There is a structural crisis of the EU as a system. That was well and effectively in the period of growth and prosperity, was problematic and ineffective in times of crisis. Without deeper integration without structural reform of the system operation, without a common European strategy, the EU has no future. In its current form, the EU is not sustainable. Ahead of a new wave of global crisis. The time for discussion no longer exists. The absence of the necessary decisions, no real action will lead to the fact that Europe will be a wave of ETC at very stringent scenario ( http://crisismir.com/analiticheskie-materialy/ekonomika/54-chto-god-gryadushhij-nam-gotovit-prognoz-na-2012-god-i-ne-tolko.html ). Alas, it is almost a foregone conclusion. The current generation of European (and not only European) politicians are not able to adequately understand what is happening. They lack the knowledge and political will. When this policy will be swept away by the crisis in their place will come others who will have to do something that did not have the political will of their predecessors.

It's much easier to do what Germany did in a period of high growth. For GIIPS, in the present circumstances, it will take years of hardship. I think it's a big risk to primarily bet on longterm solutions when most economies are still not recovered from the collapse of 2008.

After all re-assuring to read that there are still economireally sts who bring up a painful subject to their own ranks: This is a political crisis in first place and as such has to be addressed by political reforms (one might even call for an systemic overhaul?!) before any of the economic advice given by our economic thought leaders on how to overcome this crisis - and I do not mean this disrespectfully, who I am - will take ground. "It´s the sequence, stupid!" - one might by tempted to exclaim.

It is good to read this forward-looking view of eurozone feasibility. There is too much negativity, almost wishing it to fail. As you point out, the UK and USA are probably not on a more sustainable *structural* footing than eurozone countries.

Two points: Certainly acceptance by recipient countries of the fiscal pact and technical assistance is needed. But you diplomatically skirt around the issue of demonstrable willingness to reform. No amount of paper signing, conditionality promises, and technical help will suffice without the bold national leadership to actually carry out meaningful structural adjustment in recipient countries.

The populations those leaders govern are in desperate need of culture-neutral persuasion and ideological reorientation with the objective of facing reality.

Secondly: I only mention the above because my understanding of the history of the Marshall Plan is that the economy minister, Ludwig Erhard, set the wheels of reform rolling (freeing prices etc.). Marshall aid came after that to help ease pain and as a confidence booster. The amount of Marshall money was not as important as combined (psychological) demonstration of (a) strong coherent national initiative and (b) external material signs of reassurance.

So the sequence was/is -- first, commitment to market economy and its rules; second, money to provide leeway for concessions to those worst affected by the temporary adjustment costs (e.g. unemployment) so as to prevent political reversals of liberalization. I think this matches the fiscal reform sequence (the relevant market rules, then money).

In the end you are right though, but perhaps perversely, because “acceptance of the fiscal pact” translates to loss of full sovereign control of budgets. The problem with doing it that way is that ideological persuasion of national populations becomes the responsibility of the EU not the national government. There will be anti-EU riots like IMF riots in Latin America in the 1980s. It would be better if the national leaders started first, at home, like Erhard did in Germany 1945 *before* the Marshall Plan. Arguably as the East Asian countries too (post-1997).